Is more infrastructure spending the solution to our economic woes?
Politicians on both sides of the aisle seem to love infrastructure spending. They get to brag about all the jobs they created. Sometimes they get an airport or a bridge or a highway named after them. And infrastructure spending is supposed to help economy. But does it, really?
Consider Japan. In the ‘70s and ‘80s Japan’s economy was booming. We were all “turning Japanese.” After decades of strong economic expansion, they experienced a massive asset bubble. I remember discussion of how the Imperial Gardens in Tokyo were priced higher than the entire State of California. Then the bubble burst. The Nikkei stock market index, which topped out at 38,500 in 1989, fell below 15,000 by August 1992. And it kept going down: by 2001 it dipped below 10,000.
To fight the malaise that comes along with a falling market, Japan invested enormously in bridges, tunnels, highways, trains, and airports. The country spent over 8% of their economy annually on these projects—the equivalent of $1.5 trillion per year here—producing some engineering marvels along the way—like the world’s longest suspension bridge or expanding their famous bullet train network. The government’s desire for new projects was so great that it seemed as if they intended to pave over the whole island of Honshu.
“Turning Japanese” album cover. Source: Wikipedia
But the trillions of dollars in government spending didn’t lift Japan out of its funk. It may have kept some people working, but it certainly didn’t jump-start their economy. Indeed, these expenditures are the main reason the nation now labors under a mountain of debt. Japan’s government debt is more than twice the size of their economy.
Infrastructure is an investment, the same way a new factory or educational degree is. And, like any investment, the effort can be fruitful or it can be wasted. If we’re going into a computer boom, a degree in systems design will be more economically productive than one in puppetry. Building a new runway for New York’s hectic LaGuardia Airport is going to have a higher return than building a high-speed rail line between Concord, NH and Boston. I’m sure people in New England would love to have shorter commuting times, but saving 20 minutes per day won’t magically transform us into massively more creative and productive people.
It’s a mistake to draw lessons from past infrastructure projects for twenty-first century spending. The Erie Canal and Interstate Highway System brought enormous value in their time because the transportation alternatives back then were so abysmal. But repaving our roads and modernizing airport terminals today simply won’t have the same impact. I’m not saying that we shouldn’t maintain the infrastructure we have—that’s an ongoing cost. But don’t ask a society of civil engineers if we spend enough money on public projects. That’s like asking teachers if we spend enough on education, or travel agents if we take enough time off.
Akashi Bridge in Kobe. Photo: Kim Rötzel. Source: Wikipedia
Economics teaches two major lessons: people make better choices when their own money is at stake, and competition produces better results. Large-scale federal involvement in transportation spending means that there is little of either. We have world-class technology and world-class entertainment with minimal government spending. We should try to build our infrastructure along the same lines.
Douglas R. Tengdin, CFA
Chief Investment Officer